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208 Z. Zhang Hill 2007). The original version of the Lieberman-Warner bill incorporated this mechanism, threatening to punish energy-intensive imports from developing countries by requiring importers to obtain emission allowance, but only if they had not taken comparable actions by 2020, eight years after the effective start date of a U.S. cap-and-trade regime begins. It was argued that the inclusion of trade provisions would give the U.S. additional diplomatic leverage to negotiate multilaterally and bilaterally with other countries on comparable climate actions. Should such negotiations not succeed, trade provisions would provide a means of leveling the carbon playing field between American energy-intensive manufacturers and their competitors in countries not taking comparable climate actions. Not only would the bill have imposed an import allowance purchase requirement too quickly, it would have also dramatically expanded the scope of punishment: almost any manufactured product would potentially have qualified. If strictly implemented, such a provision would pose an insurmountable hurdle for developing countries (The Economist 2008). It should be emphasized that the aim of including trade provisions is to facilitate negotiations while keeping open the possibility of invoking trade measures as a last resort. The latest version of the Lieberman-Warner bill has brought the deadline forward to 2014 to gain business and union backing. 3 The inclusion of trade provisions might be considered the “price” of passage for any U.S. legislation capping its greenhouse gas emissions. Put another way, it is likely that no climate legislation can move through U.S. Congress without including some sort of trade provisions. An important issue on the table is the length of the grace period to be granted to developing countries. While many factors need to be taken into consideration (Haverkamp 2008), further bringing forward the imposition of allowance requirements to imports is rather unrealistic, given the already very short grace period ending 2019 in the original version of the bill. It should be noted that the Montreal Protocol on Substances that Deplete the Ozone Layer grants developing countries a grace period of 10 years (Zhang 2000). Given that the scope of economic activities affected by a climate regime is several orders of magnitude larger than those covered by the Montreal Protocol, if legislation incorporates border adjustment measures (put the issue of their WTO consistency aside), in my view, they should not be invoked for at least 10 years after mandatory U.S. emission targets take effect. Moreover, unrealistically shortening the grace period granted before resorting to the trade provisions would increase the uncertainty of whether the measure would withstand a challenge by U.S. trading partners before the WTO. As the ruling in the Shrimp-Turtle dispute indicates (see Box 2), for a trade measure to be considered WTO-consistent, a period of good-faith efforts to reach agreements among the countries concerned is needed before imposing such trade measures. Put another way, trade provisions should be preceded by major efforts to negotiate with partners within a reasonable timeframe. Furthermore, developing countries need a reasonable length of time to develop and operate national climate policies and measures. Take 3 This is in line with the IBEW/AEP proposal, which requires U.S. importers to submit allowances to cover the emissions produced during the manufacturing of those goods two years after U.S. starts its capand-trade program (McBroom 2008).
The U.S. proposed carbon tariffs, WTO scrutiny and China’s responses 209 the establishment of an emissions trading scheme as a case in point. Even for the U.S. SO2 Allowance Trading Program, the entire process from the U.S. Environmental Protection Agency beginning to compile the data for its allocation database in 1989 to publishing its final allowance allocations in March 1993 took almost four years. For the first phase of the EU Emissions Trading Scheme, the entire process took almost 2 years from the EU publishing the Directive establishing a scheme for greenhouse gas emission allowance trading on 23 July 2003 to it approving the last national allocation plan for Greece on 20 June 2005. For developing countries with very weak environmental institutions and that do not have dependable data on emissions, fuel uses and outputs for installations, this allocation process is expected to take much longer than what experienced in the U.S. and the EU (Zhang 2007b). Box 1 Core WTO principles GATT Article 1 (‘most favored nation’ treatment): WTO members not allowed to discriminate against like imported products from other WTO members GATT Article III (‘national treatment’): Domestic and like imported products treated identically, including any internal taxes and regulations GATT Article XI (‘elimination of quantitative restrictions’): Forbids any restrictions (on other WTO members) in the form of bans, quotas or licenses GATT Article XX “Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be constructed to prevent the adoption or enforcement by any contracting party of measures… (b) necessary to protect human, animal or plant life or health; … (g) relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption; ...” The threshold for (b) is higher than for (g), because, in order to fall under (b), the measure must be “necessary”, rather than merely “relating to” under (g). Box 2 Implications of the findings of WTO the shrimp-turtle dispute To address the decline of sea turtles around the world, in 1989 the U.S. Congress enacted Section 609 of Public Law 101-162 to authorize embargoes on shrimp harvested with commercial fishing technology harmful to sea turtles. The U.S. was challenged in the WTO by India, Malaysia, Pakistan and Thailand in October 1996, after embargoes were leveled against them. The four governments challenged this measure, asserting that the U.S. could not apply its laws to foreign process and production methods. A WTO Dispute Settlement Panel was established in April 1997 to hear the case. The Panel found that the U.S. failed to approach the complainant nations in serious multilateral negotiations before enforcing the U.S. law against those nations. The Panel held that the U.S. shrimp embargo was a class of measures of processes-and-production-methods type and had a serious threat to the multilateral trading system because it conditioned market access on the conservation policies of foreign countries. Thus, it cannot be justified under GATT Article XX. However, the WTO Appellate Body overruled the Panel’s reasoning. The Appellate Body held that a WTO member requires from exporting countries compliance, or adoption of, certain policies prescribed by the importing country does not render the measure inconsistent with the WTO obligation. Although the Appellate Body still found that the U.S. shrimp embargo was not justified under GATT Article XX, the decision was not on ground that the U.S. sea turtle law itself was not inconsistent with GATT. Rather, the ruling was on ground that the application of the law constituted “arbitrary and unjustifiable discrimination” between WTO members (WTO 1998). The WTO Appellate Body pointed to a 1996 regional agreement reached at the U.S. initiation, namely the Inter-American
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358 T. Machiba While industries are
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